If you have ever wondered why some companies split their shares into smaller chunks, this article is for you. In essence share splits do not make any meaningful difference to the fundamentals of a company.

It is the equivalent of cutting the same pizza into more pieces.

This is why there is some scepticism around companies undertaking a share split. It could be interpreted as management cynically trying to juice the share price. That said, it does seem to work.

New research from Bank of America reveals that companies undertaking share splits see their share price go up 25% on average in the following 12-months, outperforming the 12% average delivered by the market.

That is quite a lot more juice, so what is going on?

The authors of the research believe share splits democratise share ownership by making shares more affordable to the average investor. They may have a point.

Consider Apple (AAPL:NASDAQ) whose shares are widely held by many retail investors. The company has split its share price five times since floating on the stock market.

Had the company not made those splits the shares would today cost more than $50,000 a pop, rather than the current $250 per share.

AI darling Nvidia (NVDA:NASDAQ) provides another remarkable example of the effect of not splitting share prices. The company has conducted six share splits since 2000, without which, the shares would trade today at $54,000.

Notwithstanding US investors can access fractional share ownership platforms, arguably the exorbitant price of the unsplit share is a large barrier to broad retail share ownership.

It is worth noting the UK government has committed to changing current ISA (Individual savings accounts) rules to allow certain fractional shares.  

HOW A STOCK SPLIT CAN WORK IN PRACTICE

Company A has a share price of £1,000 and 1 million shares outstanding and does a 10-for-one split, reducing the share price to £100 while the number of shares increases by a factor of 10 to 10 million.

The market capitalisation of the company remains £1 billion in both cases, so do not be fooled, nothing has changed. (100 x 10 million = 1,000 x 1 million)

Why do share prices get so high? As famed investor Terry Smith is fond of reminding people, in the long run share prices track profits. This suggests a high share price often reflects the historical growth rate and economic success of a business.

Over many decades this compounding effect can drive share prices to exorbitant levels.

Nowhere is this more evident than with US conglomerate Berkshire Hathaway (BRK-B:NYSE) whose A-shares cost over three-quarters of a million dollars each.

Since taking over the company in 1965 at $19 per share, CEO and chairman Warren Buffett has transformed the struggling textile business into an economic powerhouse, comprised of over 189 businesses and a public equities portfolio worth $272 billion.

Berkshire shares have delivered a compound annualised return of 19.9% a year over those sixty years compared with a 10.4% annualised return for the S&P 500 index.

Berkshire also has B-shares in issue which can be converted into A-shares at any time.

Buffett issued the bulk of the B-shares in 1996 with the part-equity funded purchase of BNSF Railroad, along with a 50 for one share split. Today the B-shares cost around $500 each, still a large number, but a lot easier to swallow than the A-shares.

Buying a single share in Swiss-based premium chocolate maker Lindt & Sprungli (LISN:SWX) would set you back around £100,000 (CHF114,000) but the share price would be even higher had the company not made a five-for-one split in 2008.

Including the share split, the shares would today cost just under half a million pounds apiece, close to the cost of owning a share in Berkshire.

As well as the idea of democratising share ownership, share splits may also create higher daily liquidity. The reason this is important is because effective price discovery tends to work best when there is an abundance of willing buyers and sellers.

There are other interesting takeaways from the Bank of America research paper.

Share splits flash a positive signal to investors that business prospects are likely to continue, demonstrating management confidence.

This may lead to analysts upping their earnings estimates, providing further momentum for the shares. Share prices of companies receiving positive earnings revisions tend to outperform the market.

STOCK SPLITS ARE INCREASING, WHO COULD BE NEXT?

The pace of stock splits is increasing, says Bank of America with 17 announced in 2024, the highest number in a decade.

Not only that, but the magnitude of outperformance is also rising as demonstrated by the 17% outperformance over six months for those 17 companies announcing share splits in 2024.

These include fast food group Chipotle (CMG:NYSE) which undertook a 50-for-one split, network infrastructure company Broadcom (AVGO:NASDAQ) did a 10-for-one split and Nvidia competed a 10-for-one split on 10 June 2024.

As we have discussed, some companies choose to split often, while others, notably Lindt and Berkshire have conducted just one share split throughout their long history.

While we would never suggest making an investment based on a share split alone, the evidence for a share price pop following a share split seems reasonably compelling.

Companies with high share prices tend to have a good track record of earnings growth, so picking potential investment candidates from such a list is arguably not a terrible to start investigating further.

Four of the most expensive companies have never enacted a stock split including Berkshire Hathaway, insurance and investment company Markel (MKL:NYSE), Biscoff biscuit maker Lotus Bakeries (LOTB:EBR) and fantasy games and miniatures retailer Games Workshop (GAW).

One of the latest companies to announce a stock split is coke bottler Coca-Cola Consolidated (COKE:NYSE) which announced a 10-for-one stock split on 4 March, pending shareholder approval at its 16 May shareholding meeting.

The shares trade around $1,300 which implies a post-split price of $130 when they begin trading on 27 May 2025. Chair and CEO J. Frank Harrison said the split aims to make the shares more accessible to a wider range of investors.

Given the high price of Markel’s shares ($1,834) and the fact they have never split them, it seems unlikely the firm will start now.

Netflix (NFLX:NASDAQ) looks more promising. The streaming giant last split its shares a decade ago in a seven for one ratio when they traded around $420. Today they sit close to $1,000.

Obesity treatment and insulin specialist Eli Lilly (LLY:NYSE) has seen its shares fly over the last five years, driven by the huge success of Wegovy and Zepbound.

The shares are up more than 500% in that period, trading at nearly $900 per share. The company last made a share split in 1997, so another one is long overdue.

Membership warehouse retail operator Costco (COST:NYSE) has split its shares two times, the last one in 2000 when it enacted a two-for-one split. The shares would cost $3,700 had the company not split rather than $1,037 today.

In December 2024 chief financial officer Gary Millerchip told analysts there were no near-term plans to undergo a share split because employees and retail investors likely have access to fractional share buying.

‘But we do also recognise that there’s a benefit of the stock feeling more affordable for our retail investors and employees who are very important constituents for us. So, we’ll continue to evaluate over time,’ added Millerchip, leaving the door open for a split. 

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